For a while a few years ago, litigation reform bylaws were all the rage – including forum selection bylaws, fee shifting bylaws, even mandatory arbitration bylaws. More recently, discussion of the topic quieted down, in part because the Delaware legislature enacted legislation allowing Delaware corporations to adopt forum selection bylaws while also prohibiting fee-shifting bylaws. However, the topic of litigation reform bylaws may be back on the docket again. In a speech earlier this week, SEC Commissioner Michael Piwowar invited companies heading toward an IPO to adopt arbitration provisions in their corporate bylaws.
According to a July 17, 2017 Reuters article entitled “U.S. SEC’s Piwowar Urges Companies to Pursue Mandatory Arbitration Clauses” (here), Piwowar said in a speech at the Heritage Foundation that “For shareholder lawsuits, companies can come to us to ask for relief to put in mandatory arbitration into their charters. I would encourage companies to come and talk to us about that.” A video recording of Piwowar’s speech can be found here.
As Alison Frankel points out on here On the Case blog (here), mandatory arbitration of shareholder claims is not a new idea. Academics have been debating the possibility for decades. And as I noted in a post a few years ago, several courts did uphold the enforceability of one company’s bylaw provision requiring arbitration of shareholder claims.
Nevertheless, at least until now, the view has been that the SEC opposes provisions requiring shareholder claims to be arbitrated. The agency’s position has been a corporate charter provision mandating arbitration of shareholder claims would violate Section 29 of the ’34 Act, which voids any contractual provision that would seek to waive any right under the statute. As I noted in a post at the time (here), in 2012, the SEC advised the Carlyle Group, which planning an IPO, that owing to the mandatory shareholder claim arbitration provision in the company’s bylaws, the agency would not accelerate the firm’s registration statement. Carlyle ultimately withdrew the arbitration provision.
Piwowar’s comments at the Heritage Foundation earlier this week seem to suggest that perhaps the agency will now take a different position on mandatory shareholder claim arbitration provisions. What isn’t clear is SEC Commissioner Jay Clayton stands on the issue. In his first public speech a few days ago, SEC Chair Jay Clayton called generally for regulatory reform and even invited companies to petition the SEC for disclosure requirement exemptions, but he said nothing about mandatory arbitration provisions.
Though Piwowar seems to have invited companies planning IPOs to step forward with mandatory securities claim arbitration provisions, there may be some good reasons for companies to hold back until the situation is clarified. For starters, notwithstanding Piwowar’s comments, it is not entirely clear whether a securities claim arbitration provision would withstand scrutiny. Among other things, a court might conclude that, notwithstanding the SEC’s position, an arbitration provision is contrary to the prohibitions in Section 29.
There may be a more practical reason companies might hold back from adopting a securities claim arbitration provision, and that is concern about the market’s reaction. In her blog post, Frankel raised the question whether big institutional investors might balk at waiving their right to sue. Frankel quotes Columbia Law School Professor John Coffee as noting that a company’s adoption of an arbitration provision could have an impact on the company’s share price at the IPO. On the other hand, Frankel also quotes Michigan Law School Professor Adam Pritchard as suggesting that investors might pay more for shares of companies that could be able to avoid the expenses of securities class action lawsuits.
In any event, I expect that we will be hearing a great deal more about this topic. We likely will hear more from Piwowar himself, and perhaps even from Clayton. I also think that it will not be long before a company takes Piwowar up on his invitation and steps forward for an IPO with a securities claim arbitration provision in its bylaws. If the IPO candidate’s submission passes agency muster, not only will these kinds of provisions quickly become standard for IPO companies, but many of the already public companies will quickly take steps to adopt similar provisions, just as they did with forum selection bylaw provisions a few years ago.
So, just to follow this conjecture to its logical conclusion, what might it mean if shareholder securities claim arbitration provisions become standard? It could mean serious changes in the way securities claims are litigated in this country. Indeed, it is possible that the current securities class action litigation mechanism could be completely dismantled, as prospective claimants are diverted into individual arbitration proceedings.
To whatever extent changes of this magnitude are even in the realm of the possible, we are a long way off from any of these kinds of things taking place. Even if these kinds of arbitration provisions actually do take hold, there are still a lot of other things that could happen. As we saw a few years ago when fee-shifting bylaw provisions were all the rage, the Delaware legislature stepped forward and changed the relevant laws, pretty much stopping the fee-shifting bylaw bandwagon in its tracks. By the same token, if securities claim arbitration provisions were to take off, Congress might act. Sure, both houses of Congress are dominated by Republicans now, but as we have seen this week, Republicans do not always act in unison. In addition, Congress blows hot and cold on securities litigation issues (compare the PSLRA to SOX and Dodd-Frank).
My crystal ball is no better than anybody else’s, so I am not making any predictions about where any of this is headed. Except this one – if Piwowar’s recent suggestion succeeds on getting things started, it could get very interesting. For now, put the question of mandatory securities claim arbitration provisions at the top of the list of things to watch.
One final note – if you are not reading Frankel’s blog every single day, you are making a mistake. Her post on Piwowar’s comments and the topic of securities claim arbitration clauses is particularly good and worth reading at length and in full.
Anything Better Than July?: Nope.